Relief for tech firms as govt sheathes tax sword

SummaryIn a move that would bring relief to Wipro and Infosys and provide clarity on a key tax issue to the Indian software industry at large, the Central Board of Direct Taxes said on Thursday that software developed abroad at a client site will be eligible for tax benefits.

Onshore software development is the practice wherein Indian companies send their software engineers on short assignments (3-6 months) to overseas companies. Doubts have been raised on whether units taking up such production of software at the client’s premises would be eligible for the tax holiday.

The government had contended revenue from software development activity and technical manpower deputed abroad are not considered as export income eligible for deduction under 10A/10B/10AA of the Income-Tax Act, 1961.

The government had said that Infosys had claimed the revenues generated from onshore software development activities and deputation of technical manpower abroad as related to business activities conducted out of its Software Technology Park and Special Economic Zone units in India as eligible for income-tax deduction.

Infosys, Wipro and many other software export firms claimed tax benefits for software export income under Section 10A of the Income Tax Act. This section provides for a five-year tax holiday to industrial undertakings which manufacture or produce any article or thing and are set up in notified Free Trade Zones (FTZs). The tax holiday under section 10A to industrial units in approved Electronic Hardware Technology Parks (EHTP) or Software Technology Parks (STP). Similarly, section 10B of the Income-tax Act allows a five-year tax holiday to approved 100% export-oriented undertakings (EOUs) which manufacture or produce any article or thing.

The government circular further clarifies that the tax holiday should not be denied on grounds of physical relocation of an eligible SEZ unit from one to another in accordance of instruction by Department of Commerce and conditions prescribed by Income- tax act. The circular says, the unit relocated will be eligible to avail tax benefit for the unexpired period at the applicable rates.

The government also clarified that engineering and design can be considered research and development. Saxena said the government is still examining the Rangachary committee’s recommendations on safe harbour regulations.